<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 27, 1998
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-11893
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GUESS ?, INC.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-3679695
--------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1444 South Alameda Street
Los Angeles, California, 90021
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(Address of principal executive offices)
(213) 765-3100
------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
As of November 11, 1998, the registrant had 42,906,535 shares of Common Stock,
$.01 par value, outstanding.
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GUESS ?, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
as of September 27, 1998 and December 31, 1997 . . . . . . . . . 1
Condensed Consolidated Statements of Earnings (Unaudited) -
Three and Nine Months Ended September 27, 1998 and
September 28, 1997 . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 27, 1998 and September 28, 1997. . . 4
Notes to Condensed Consolidated Financial Statements (Unaudited) . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures about Market Risks. . . .15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . .16
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . .17
Item 3. Defaults on Senior Securities. . . . . . . . . . . . . . . . . . .17
Item 4. Submission of Matters to Vote of Security Holders. . . . . . . . .17
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . .17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . .18
</TABLE>
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
Sep 27, Dec 31,
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,462 $8,204
Receivables:
Trade receivables, net . . . . . . . . . . . . . . . . . 32,367 17,080
Royalties. . . . . . . . . . . . . . . . . . . . . . . . 13,805 14,663
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 2,403 6,032
-------- --------
48,575 37,775
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 103,706 92,081
Prepaid taxes. . . . . . . . . . . . . . . . . . . . . . . 4,511 14,705
Prepaid expenses and other current assets. . . . . . . . . 14,618 14,857
-------- --------
Total current assets . . . . . . . . . . . . . . . . . 175,872 167,622
Property and equipment, at cost, less accumulated
depreciation and amortization. . . . . . . . . . . . . . . 88,490 98,170
Other assets, at cost, less accumulated amortization . . . . 19,181 22,022
-------- --------
$283,543 $287,814
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable
and long-term debt. . . . . . . . . . . . . . . . . . . . $ - $217
Accounts payable . . . . . . . . . . . . . . . . . . . . . 35,331 38,323
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 17,330 22,314
Income taxes payable . . . . . . . . . . . . . . . . . . . 98 98
-------- --------
Total current liabilities. . . . . . . . . . . . . . . 52,759 60,952
Notes payable and long-term debt, less current
installments . . . . . . . . . . . . . . . . . . . . . . . 124,900 141,300
Other liabilities. . . . . . . . . . . . . . . . . . . . . . 9,538 10,232
-------- --------
187,197 212,484
</TABLE>
1
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GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Sep 27, Dec 31,
1998 1997
-------- --------
<S> <C> <C>
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued and outstanding . . . . . . . . . . - -
Common stock, $.01 par value. Authorized 150,000,000
shares; issued 62,937,327 and 62,928,827 shares;
outstanding 42,906,535 and 42,898,035 shares at,
September 27, 1998 and December 31, 1997, respectively,
including 20,030,792 shares in Treasury. . . . . . . . . . . 137 137
Additional paid-in capital . . . . . . . . . . . . . . . . . . 158,589 158,589
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 88,461 67,432
Accumulated comprehensive income . . . . . . . . . . . . . . . (65) (52)
Treasury stock, 20,030,792 shares repurchased. . . . . . . . . (150,776) (150,776)
-------- --------
Net stockholders' equity . . . . . . . . . . . . . . . . . 96,346 75,330
-------- --------
$283,543 $287,814
-------- --------
-------- --------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
2
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GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months ended
----------------------- -----------------------
Sep 27, Sep 28, Sep 27, Sep 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
Product sales. . . . . . . . . . . . . . . . . . $118,602 $126,978 $309,102 $357,112
Net royalties. . . . . . . . . . . . . . . . . . 11,536 15,464 29,872 39,581
-------- -------- -------- --------
130,138 142,442 338,974 396,693
Cost of sales. . . . . . . . . . . . . . . . . . . 75,356 78,068 193,505 216,286
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . 54,782 64,374 145,469 180,407
Selling, general & administrative. . . . . . . . . 35,424 39,250 100,664 111,676
-------- -------- -------- --------
Earnings from operations . . . . . . . . . . 19,358 25,124 44,805 68,731
Non-operating income (expense):
Interest, net. . . . . . . . . . . . . . . . . . (3,188) (3,480) (9,779) (9,893)
Other, net . . . . . . . . . . . . . . . . . . . (367) 55 (591) 126
-------- -------- -------- -------
(3,555) (3,425) (10,370) (9,767)
Earnings before income taxes and
cumulative effect of change in
accounting principle. . . . . . . . . . . . 15,803 21,699 34,435 58,964
Income taxes (note 5). . . . . . . . . . . . . . . 6,164 8,593 13,405 23,278
-------- -------- -------- --------
Earnings before cumulative effect of
change in accounting principle. . . . . . . . . . 9,639 13,106 21,030 35,686
Cumulative effect of change in accounting
for product display fixtures, net of
income tax expense of $2,707 (note 4) . . . . . . - - - 3,961
-------- -------- -------- --------
Net earnings . . . . . . . . . . . . . . . . $9,639 $13,106 $21,030 $39,647
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted earnings per share:
- ------------------------------------
Earnings before cumulative effect of change
in accounting principle . . . . . . . . . . . . . $0.22 $0.31 $0.49 0.83
Cumulative effect of change in accounting
for product display fixtures, net of
income tax expense of $2,707 (note 4) . . . . . . - - - $0.09
-------- -------- -------- --------
Net earnings - basic and diluted. . . . . . . . . $0.22 $0.31 $0.49 $0.92
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of common shares
outstanding - basic. . . . . . . . . . . . . . . 42,906 42,898 42,904 42,898
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of common shares
outstanding - diluted. . . . . . . . . . . . . . 42,907 42,898 42,905 42,911
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
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GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
Sep 27, Sep 28,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . $21,030 $39,647
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization of property and equipment. . . 16,993 14,358
Amortization of goodwill . . . . . . . . . . . . . . . . . . 619 503
Amortization of deferred royalty income. . . . . . . . . . . - (1,352)
Cumulative effect of change in accounting
principle (note 4). . . . . . . . . . . . . . . . . . . . - (3,961)
Loss (gain) on disposition of property and equipment . . . . 80 (215)
Foreign currency translation adjustment. . . . . . . . . . . (68) (48)
Undistributed equity method earnings . . . . . . . . . . . . 19 (126)
(Increase) decrease in:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . (10,800) (14,368)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . (11,625) (26,374)
Prepaid expenses and other current assets. . . . . . . . . 10,434 (5,302)
Other assets . . . . . . . . . . . . . . . . . . . . . . . 1,537 (874)
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . . . (2,991) 1,653
Accrued expenses . . . . . . . . . . . . . . . . . . . . . (4,452) (6,234)
Income taxes payable . . . . . . . . . . . . . . . . . . . - (6,882)
-------- --------
Net cash provided by (used in) operating activities . . . . 20,776 (9,575)
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . (8,784) (33,260)
Proceeds from the disposition of property and equipment. . . . 8 1,253
Lease incentives granted . . . . . . . . . . . . . . . . . . . 154 1,187
Acquisition of license . . . . . . . . . . . . . . . . . . . . (146) (2,273)
(Increase) decrease in short-term investments. . . . . . . . . - 4,401
(Increase) decrease in long-term investments . . . . . . . . . 812 (1,435)
-------- --------
Net cash used in investing activities . . . . . . . . . . . (7,956) (30,127)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt . . . . . . . . 80,700 126,835
Repayments of notes payable and long-term debt . . . . . . . . (97,317) (89,177)
-------- --------
Net cash provided by (used in) financing activities . . . . (16,617) 37,658
Effect of exchange rates on cash . . . . . . . . . . . . . . . . 55 (200)
Net decrease in cash . . . . . . . . . . . . . . . . . . . . . . (3,742) (2,244)
Cash, beginning of period. . . . . . . . . . . . . . . . . . . . 8,204 8,800
-------- --------
Cash, end of period. . . . . . . . . . . . . . . . . . . . . . . $4,462 $6,556
-------- --------
-------- --------
</TABLE>
4
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GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------
Sep 27, Sep 28,
1998 1997
-------- --------
<S> <C> <C>
Supplemental disclosures:
Cash paid during the period for:
Interest ................................................ $14,741 $14,430
Income taxes ............................................ 1,930 33,180
</TABLE>
Supplemental disclosure of noncash investing activities:
During the quarter ended March 30, 1997, the Company issued 216,216 shares of
common stock with a value of $3.0 million in connection with the acquisition of
a license.
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1998
(1) Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared on
the same basis as the audited condensed consolidated financial statements and,
in the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation for each of the periods
presented. The results of operations for interim periods are not necessarily
indicative of results to be achieved for full fiscal years.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, they have been condensed and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
(2) Summary of Significant Accounting Policies
Earnings Per Share
Basic earnings per share represent net earnings divided by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
represent net earnings divided by the weighted-average number of shares
outstanding, inclusive of the dilutive impact of common stock equivalents.
During the three and nine months ended September 27, 1998 and September 28,
1997, the difference between basic and diluted earnings per share was due to the
dilutive impact of options to purchase common stock.
Recently Issued Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. SFAS 130 requires all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement displayed with the
same prominence as other financial statements. SFAS 130 does not require a
specific financial statement format but requires an enterprise to display an
amount representing total comprehensive income for the period covered by that
financial statement. SFAS 130 requires an enterprise to (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997.
The Company adopted SFAS 130 on January 1, 1998. The only difference between
"net earnings" and "comprehensive income" is the impact from foreign currency
translation adjustments. Accordingly, a reconciliation of comprehensive income
for the three and nine months ended September 27, 1998 and September 28, 1997 is
as follows (in thousands):
6
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
Sep 27, Sep 28, Sep 27, Sep 28,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings.................. $9,639 $13,106 $21,030 $39,647
Foreign currency
translation adjustment....... 71 (14) 68 48
--------- --------- --------- ---------
Comprehensive income.......... $9,710 $13,092 $21,098 $39,695
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
In June 1997, FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
130"). SFAS 131 established standards for public business enterprises to report
information about operating segments in annual financial statements and require
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also established standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes FASB Statement No. 14, Financial Reporting
for Segments of a Business Enterprise, but retains the requirement to report
information about major customers. It amends FASB Statement No. 94,
"Consolidation of All Majority-Owned Subsidiaries", to remove the special
disclosure requirement for previously unconsolidated subsidiaries. SFAS 131
requires, among other items, that a public business enterprise report a measure
of segment profit or loss, certain specific revenue and expense items, and
segment assets information about the revenue derived from the enterprise's
products or services and major customers. SFAS 131 also requires the enterprise
report descriptive information about the way that the operating segments were
determined and the products and services provided by the operating segments.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. SFAS 131 need not be applied to interim
financial statements in the initial year of application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application. Management believes the adoption of SFAS 131 will not have a
material impact on the Company's financial reporting.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company will
adopt SOP 98-1 effective in 1999. The adoption of SOP 98-1 will require the
Company to modify its method of accounting for software. Based on the
information currently available, the Company does not expect the adoption of SOP
98-1 to have a significant impact on its financial position or results of
operations.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires that costs of start-up activities, including
organization costs and retail store openings, be expensed as incurred. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. Earlier application is encouraged. Restatement of previously issued
financial statements is not permitted. In the fiscal year in which the SOP 98-5
is first adopted, the application should be reported as a cumulative effect of a
change in accounting principle. Management believes the adoption of SOP 98-5
will not have a material impact on the Company's financial reporting.
7
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In June 1998, the FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 modifies the
accounting for derivative and hedging activities and is effective for fiscal
years beginning after December 15, 1999. Since the Company does not presently
invest in derivatives or engage in hedging activities, SFAS No. 133 will not
impact the Company's financial position or results of operations.
(3) Inventories
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
Sep 27, Dec 31,
1998 1997
--------- ---------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . $11,606 $12,988
Work in progress. . . . . . . . . . . . . . . . 15,281 8,059
Finished goods. . . . . . . . . . . . . . . . . 76,819 71,034
--------- ---------
$103,706 $92,081
--------- ---------
--------- ---------
</TABLE>
(4) Change in Accounting Principle
Effective January 1, 1997, the Company changed its method of accounting for
product display fixtures located in its wholesale customers' retail stores,
whereby the costs for such fixtures are capitalized and depreciated over five
years using the straight-line method. In prior years, these costs had been
expensed as incurred. The Company believes this method more closely matches the
long-term benefit that the product display fixtures provides with the expected
future revenue from such fixtures. The cumulative effect of the change in
accounting principle, recorded in the first quarter of 1997, is calculated based
upon the retroactive effect of applying the new accounting method to prior year
fixture acquisitions. The cumulative effect of the change in accounting
principle of $4.0 million (after reduction of income tax expense of $2.7
million) is included in earnings for the nine months ended September 28, 1997.
(5) Income taxes
Income taxes for the interim periods were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management.
8
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Various forward-looking statements have been made in this Form 10-Q.
Forward-looking statements may also be in the registrant's other reports filed
under the Securities Exchange Act of 1934, in its press releases and in other
documents. In addition, from time to time, the registrant through its
management may make oral forward-looking statements.
Forward-looking statements generally refer to future plans and performance, and
are identified by the words "believe," "expect," "anticipate," "optimistic,"
"intend," "aim," "will" or other similar expressions. Readers are cautioned not
to place undue reliance on these forward-looking statements, which refer only as
of the date on which they are made. The registrant undertakes no obligation to
update publicly or revise any forward-looking statements. These statements
involve risks and uncertainties, which may cause the Company's actual results in
future periods or plans for future periods to differ materially from what is
currently anticipated. Those risks include the timely availability and
acceptance of products, the impact of competitive products, the appeal of the
Company's new girl's line and other risks detailed from time to time in the
Company's SEC reports, including those on Form 10-K for the year ended December
31, 1997.
OVERVIEW
The Company derives its net revenue from the sale of Guess men's, women's and
girl's apparel worldwide to wholesale customers and distributors; from the sale
of Guess men's, women's and girl's apparel and its licensees' products through
the Company's network of retail and factory stores located primarily in the
United States; and from net royalties via worldwide licensing activities.
RESULTS OF OPERATIONS
NET REVENUE. Net revenue decreased $12.2 million or 8.6% to $130.2 million in
the third quarter ended September 27, 1998 from $142.4 million in the third
quarter ended September 28, 1997. Net revenue from wholesale operations
decreased $10.3 million or 15.2% to $58.1 million from $68.4 million, due
principally to a $9.1 million decline in domestic wholesale net revenue which
resulted from increased competition in branded basic denim apparel. Net revenue
from retail operations increased $2.0 million or 3.5% to $60.5 million from
$58.5 million in the quarter ended September 27, 1998, primarily attributable to
increased volume generated by new store openings, partially offset by a 4.0%
decrease in comparable store net revenue. The decrease in comparable store net
revenue was the result of a 13.2% decrease in comparable factory outlet stores,
partially offset by an increase of 3.4% in comparable retail stores. The
decrease in comparable factory outlet store net revenue was primarily due to
product assortment changes. Net royalties decreased $3.9 million or 25.4% in the
quarter ended September 27, 1998 to $11.6 million from $15.5 million in the
quarter ended September 28, 1997, primarily the result of the discontinuation of
certain licenses that were brought back in-house, the termination of various
under-performing licenses as well as the continuing economic turmoil and
currency devaluation in Asian markets. Net revenue from international operations
comprised 8.0% and 9.1% of the Company's net revenue during the first nine
months of 1998 and 1997, respectively.
For the nine months ended September 27, 1998, net revenue decreased $57.7
million or 14.5% to $339.0 million from $396.7 million for the nine months ended
September 28, 1997. Net revenue from wholesale operations decreased $45.7
million or 21.9% to $162.8 million from $208.5 million, primarily due to
9
<PAGE>
decreases of $27.7 million in domestic wholesale net revenue and $18.0 million
in international net revenue. Domestic net revenue declined primarily due to
increased competition in branded basic denim apparel, while international
wholesale operations decreased primarily due to the sale of Guess? Italia
operations in June 1997, which reflects the absence of $15.3 million of net
revenue recorded in the prior year. For the nine months ended September 27,
1998, net revenue from retail operations decreased $2.3 million or 1.6% to
$146.3 million from $148.6 million in 1997, primarily attributable to a 12.7%
decrease in comparable store net revenue, partially offset by increased volume
generated by new store openings. The decrease in comparable store net revenue
was primarily due to product assortment changes in the company's outlet stores
and softening Pacific Rim tourism, which significantly impacted West Coast
business. For the nine months ended September 27, 1998, net royalties decreased
$9.7 million or 24.5% to $29.9 million from $39.6 million in the nine months
ended September 28, 1997, primarily the result of the discontinuation of certain
licenses that were brought back in-house, the termination of various
under-performing licenses as well as the continuing economic turmoil and
currency devaluation in Asian markets. Net revenue from international operations
comprised 8.7% and 12.0% of the Company's net revenue during the first nine
months of 1998 and 1997, respectively.
GROSS PROFIT. Gross profit decreased 14.9% to $54.8 million in the third
quarter ended September 27, 1998 from $64.4 million in the third quarter ended
September 28, 1997. The decrease in gross profit resulted from decreased net
revenue from product sales and net royalties. Gross profit from product sales
decreased 11.6% to $43.2 million in the third quarter ended September 27, 1998
from $48.9 million in the third quarter ended September 28, 1997. Gross margin
was 42.1% in the third quarter ended September 27, 1998 compared to 45.2% in the
third quarter ended September 28, 1997. Gross margin from product sales for the
third quarter ended September 27, 1998 decreased to 36.5% from 38.5% for the
third quarter ended September 28, 1997. The decrease in gross margin from
product sales was primarily due to a higher percentage of sales to off-price
retailers, which generally carry lower gross margin rates.
Gross profit decreased 19.4% to $145.5 million in the nine months ended
September 27, 1998 from $180.4 million in the nine months ended September 28,
1997. The decrease in gross profit resulted primarily from decreased net revenue
from product sales and net royalties. Gross profit from product sales decreased
17.9% to $115.6 million in the nine months ended September 27, 1998 from $140.8
million in the nine months ended September 28, 1997. Gross margin was 42.9% in
the nine months ended September 27, 1998 compared to 45.5% in the nine months
ended September 28, 1997. Gross margin from product sales for the nine months
ended September 27, 1998 decreased to 37.4% from 39.4% for the nine months ended
September 28, 1997. The decline in gross margin from product sales was
primarily due to fixed store occupancy costs being spread over a lower
comparable store revenue base in the 1998 period.
SG&A EXPENSES. Selling, general and administrative ("SG&A") expenses decreased
9.8% in the third quarter ended September 27, 1998 to $35.4 million, or 27.2% of
net revenue, compared to $39.3 million, or 27.6% of net revenue, in the third
quarter ended September 28, 1997. SG&A expenses also decreased in the nine
months ended September 27, 1998 to $100.7 million, or 29.7% of net revenue, from
$111.7 million, or 28.2% of net revenue, in the nine months ended September 28,
1997. The dollar decrease in SG&A expenses was primarily due to cost reduction
initiatives implemented in the fourth quarter of 1997 . As a percentage of net
revenue, the increase in SG&A expenses in the nine months ended September 27,
1998 was the result of fixed expenses being spread over a lower revenue base in
the 1998 period.
EARNINGS FROM OPERATIONS. Earnings from operations decreased 23.0% to $19.4
million, or 14.9% of net revenue, in the third quarter ended September 27, 1998
from $25.1 million, or 17.6% of net revenue, in the third quarter ended
10
<PAGE>
September 28, 1997. Earnings from operations decreased 34.8% to $44.8 million,
or 13.2% of net revenue, in the nine months ended September 27, 1998 from $68.7
million, or 17.3% of net revenue, in the nine months ended September 28, 1997.
The decrease in earnings from operations was primarily due to lower revenue.
INTEREST EXPENSE, NET. Net interest expense decreased 8.4% to $3.2 million in
the third quarter ended September 27, 1998 from $3.5 million in the same period
in 1997. The decrease is due to lower outstanding debt partially offset by a
higher average effective interest rate in 1998. For the third quarter ended
September 27, 1998, the average debt balance was $134.5 million, with an average
effective interest rate of 9.1%. For the third quarter ended September 28,
1997, the average debt balance was $156.0 million, with an average effective
interest rate of 8.6%. Net interest expense decreased 1.2% to $9.8 million in
the nine months ended September 27, 1998 from $9.9 million in the nine months
ended September 28, 1997, due to lower outstanding debt in 1998. For the nine
months ended September 27, 1998, the average debt balance was $142.1 million,
with an average effective interest rate of 8.8%. For the nine months ended
September 28, 1997, the average debt balance was $143.2 million, with an average
effective interest rate of 8.8%.
INCOME TAXES. The income tax provision for the third quarter ended September 27,
1998 was $6.2 million, or a 39.0% effective tax rate. The income tax provision
for the third quarter ended September 28, 1997 was $8.6 million, or a 39.6%
effective tax rate. The income tax provision for the nine months ended
September 27, 1998 was $13.4 million, or a 38.9% effective tax rate. The income
tax provision for the nine months ended September 28, 1997 was $23.3 million, or
a 39.5% effective tax rate. The effective tax rates for both years was impacted
by certain realized state tax credits and tax planning strategies.
NET EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Net
earnings before the net cumulative effect of a change in accounting principle
decreased 26.5% to $9.6 million, or 7.4% of net revenue, in the third quarter
ended September 27, 1998 from $13.1 million, or 9.2% of net revenue, in the
third quarter ended September 28, 1997. Net earnings before the cumulative
effect of a change in accounting principle decreased 41.1% to $21.0 million, or
6.2% of net revenue, in the nine months ended September 27, 1998, from $35.7
million, or 9.0% of net revenue, in the nine months ended September 28, 1997.
NET CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Effective January 1,
1997, the Company changed its method of accounting for product display fixtures
located in its wholesale customers' retail stores, whereby the costs for such
fixtures are capitalized and depreciated over five years using the straight-line
method. In prior years, these costs had been expensed as incurred. The Company
believes this method more closely matches the long-term benefits that the
product display fixtures provide with the expected future revenue from such
fixtures. The cumulative effect of the change in accounting principle, recorded
in the first quarter of 1997, is calculated based upon the retroactive effect of
applying the new accounting method to prior year fixture acquisitions. The
cumulative effect of the change in accounting principle of $4.0 million (after
reduction for income tax expense of $2.7 million) is included in earnings for
the nine months ended September 28, 1997.
NET EARNINGS. Net earnings decreased 26.5% to $9.6 million, or 7.4% of net
revenue, in the third quarter ended September 27, 1998, from $13.1 million, or
9.2% of net revenue, in the same period in 1997. Net earnings decreased 47.0%
to $21.0 million, or 6.2% of net revenue, in the nine months ended September 27,
1998, from $39.6 million, or 10.0% of net revenue, in the nine months ended
September 28, 1997.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily on internally generated funds, trade credit and
bank borrowings to finance its operations and expansion. At September 27, 1998,
the Company had working capital of $123.1 million compared to $106.7 million at
December 31, 1997. The increase in working capital was primarily due to a
seasonal $11.6 million increase in inventory and $10.8 million increase in net
receivables.
The Company's Credit Agreement, as amended, provides for a $100.0 million line
of credit facility, which includes a $25.0 million sublimit for letters of
credit. At September 27, 1998, the Company had $19.9 million in outstanding
borrowings under the revolving credit facility, $1.6 million in outstanding
standby letters of credit and $12.2 million in outstanding commercial letters of
credit. At September 27, 1998, the Company had $66.3 million available for
future borrowings under such facility. The revolving credit facility will
expire in December 1999. The Credit Agreement contains various restrictive
covenants requiring, among other things, the maintenance of certain financial
ratios. The Company was in compliance with all such covenants as of September
27, 1998.
Capital expenditures, net of lease incentives granted, totaled $8.6 million in
the nine months ended September 27, 1998 as compared to $32.1 million in the
nine months ended September 28, 1997. The Company anticipates that this lower
spending trend will continue for the remainder of 1998, consistent with its plan
for reduced expenditures for new store openings and shop-in-shop remodeling and
openings. During 1998, the Company has significantly slowed the rollout of new
retail stores and closed under-performing stores in the United States in order
to focus on improving the profitability and efficiency of existing stores.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements for the next twelve months for working capital and interest on the
Company's Senior Subordinated Notes, primarily with cash flow from operations,
supplemented, if necessary, by borrowings under its revolving Credit Agreement.
SEASONALITY
The Company's business is impacted by the general seasonal trends characteristic
of the apparel and retail industries. The Company's wholesale operations
generally experience stronger performance in the first and third quarters, while
retail operations are generally stronger in the third and fourth quarters. As
the timing of the shipment of products may vary from year to year, the result
for any particular quarter may not be indicative of results for the full year.
The Company has not had significant overhead and other costs generally
associated with large seasonal variations.
INFLATION
The Company does not believe the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its net revenue or profitability. Although higher rates
of inflation have been experienced in a number of foreign countries in which the
Company's products are manufactured, the Company does not believe they have had
a material effect on the Company's net revenue or profitability.
EXCHANGE RATES
The Company receives United States Dollars ("USD") for substantially all of its
product sales and licensing revenue. Inventory purchases from offshore contract
manufacturers are primarily denominated in USD; however, purchase prices for the
Company's products may be impacted by fluctuations in exchange
12
<PAGE>
rates between the USD and the local currencies of the contract manufacturers,
which may have the effect of increasing the Company's cost of goods in the
future. In addition, royalties received from the Company's international
licensees are subject to foreign currency translation fluctuations as a result
of the net sales of the licensee being denominated in local currency and
royalties being paid to the Company in USD. During the last three fiscal years,
exchange rate fluctuations have not had a material impact on the Company's
inventory costs. The Company currently does not engage in hedging activities
with respect to such exchange rate risk.
IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS 130 requires all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement displayed with the same prominence as other financial
statements. SFAS 130 does not require a specific financial statement format but
requires an enterprise display an amount representing total comprehensive income
for the period covered by that financial statement. SFAS 130 requires an
enterprise to (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. The Company
adopted the provisions of SFAS 130 effective January 1, 1998. The effect of the
adoption was immaterial to the Company's financial position and results of
operations for the quarter ended September 27, 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 established standards for public business enterprises to report
information about operating segments in annual financial statements and require
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also established standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes FASB Statement No. 14, Financial Reporting
for Segments of a Business Enterprise, but retains the requirement to report
information about major customers. It amends FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries, to remove the special
disclosure requirement for previously unconsolidated subsidiaries. SFAS 131
requires, among other items, that a public business enterprise report a measure
of segment profit or loss, certain specific revenue and expense items, and
segment assets information about the revenue derived from the enterprise's
products or services and major customers. SFAS 131 also requires the enterprise
report descriptive information about the way that the operating segments were
determined and the products and services provided by the operating segments.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. SFAS 131 need not be applied to interim
financial statements in the initial year of application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application. Management believes that the adoption of SFAS 131 will not have a
material impact on the Company's financial reporting.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
13
<PAGE>
Computer Software Developed or Obtained for Internal Use." The Company will
adopt SOP 98-1 effective in 1999. The adoption of SOP 98-1 will require the
Company to modify its method of accounting for software. Based on the
information currently available, the Company does not expect the adoption of SOP
98-1 to have a significant impact on its financial position or results of
operations.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires that costs of start-up activities, including
organization costs and retail store openings, be expensed as incurred. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. Earlier application is encouraged. Restatement of previously issued
financial statements is not permitted. In the fiscal year in which the SOP 98-5
is first adopted, the application should be reported as a cumulative effect of a
change in accounting principle. Management believes the adoption of SOP 98-5
will not have a material impact on the Company's financial reporting.
In June 1998, the FASB issued SFAS 133 ("SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 modifies the
accounting for derivative and hedging activities and is effective for fiscal
years beginning after December 15, 1999. Since the Company does not presently
invest in derivatives or engage in hedging activities, SFAS No. 133 will not
impact the Company's financial position or results of operations.
THE YEAR 2000 PROBLEM
Older computer software programs were written using two digits rather than four
to define the applicable year. As a result, date-sensitive computer software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This is generally referred to as "the Year 2000 problem". This situation could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. The Company is
also exposed to the risk that one or more of its suppliers could experience Year
2000 problems impacting the ability of such suppliers to provide goods and
services. Though this is not considered a significant risk with respect to the
suppliers of goods, due to the availability of alternative suppliers, the
disruption of certain services, such as utilities, could, depending upon the
extent of the disruption, have a material adverse impact on the Company's
operations.
The Company began its Year 2000 readiness assessment and remediation efforts in
1996. The effort was divided into 4 phases: Phase 1: Assessment, Phase 2:
Remediation, Phase 3: Test and Certification and Phase 4: Contingency Plans.
Phase 1 and Phase 2 included a review of all hardware and software systems,
business functions and trading partners that contain and/or exchange
date-sensitive information. Phases 1 and 2 are concluded and the Company
estimates that it will complete its Phase 3 Testing and Certification efforts by
mid-1999. The costs to change, replace and/or plan for the Year 2000 problem
are estimated by the Company to be approximately $3 million. The Company has
engaged and will continue to engage external expertise to supplement internal
staff.
The Company participates in industry specific committees to assess and
understand the readiness of its supply chain and retail trading partners. The
Company is in the process of developing it's Phase 4 Contingency Plan and
anticipates it will be in place mid-1999. This includes the assessment of all
non-IT systems with special focus on their impact to our Retail stores. There
can be no assurance that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert by another
14
<PAGE>
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks.
None.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Litigation
On August 7, 1996, a class action complaint naming the Company and certain of
its independent contractors was filed in the Superior Court of the State of
California for the County of Los Angeles, titled as Brenda Figueroa et. al. v.
Guess ?, Inc. et. al. (Case No. BC 155 165). In this case, an uncertified class
action, plaintiffs assert claims for violation of state wage and hour laws,
wrongful discharge, and breach of contract arising out of the Company's
relationship with its independent contractors and actions taken by the Company's
independent contractors with respect to the employees of such independent
contractors. Plaintiffs also allege that the Company breached its agreement with
the United States Department of Labor regarding the monitoring of its
independent contractors.
The Union of Needletrades, Industrial & Textile Employees ("UNITE") has filed
with the National Labor Relations Board ("NLRB") various charges that the
Company is engaging in unfair labor practices within the meaning of the National
Labor Relations Act ("NLRA"). These charges include allegations that the
Company has unlawfully threatened to move its production outside the United
States. These allegations have been dismissed by the Regional Director for
Region 21 of the NLRB and such dismissal has been appealed to the NLRB's Office
of Appeals.
On July 7, 1998, UNITE filed charges against the Company alleging that the
Company violated the NLRA by failing to uphold certain obligations under a prior
settlement agreement with the NLRB, by denying pro-union employees access to the
Company's facilities, by conferring new benefits to employees, by making false
accusations against UNITE, by conducting video surveillance of UNITE's offices,
and by assisting and organizing an anti-union demonstration. The NLRB has not
issued a ruling on these charges.
On February 24, 1998, the Company and Maurice Marciano, Paul Marciano and Armand
Marciano, as individuals, were named as defendants in a class action entitled
John N. Robinson v. Guess ?, Inc., Maurice Marciano, Paul Marciano and Armand
Marciano, case number BC186583, filed in the Los Angeles Superior Court. The
complaint (the "Complaint") purported to state a claim under Sections 11
12(a)(2) and 15 of the Securities Act of 1933 for alleged misrepresentations in
connection with the Company's initial public offering (the "IPO") in August
1996. Mr. Robinson purported to represent a class of all purchasers of the
Company's stock in the IPO and sought unspecified damages. Pursuant to an
agreement amongst the parties, no response was filed to the Complaint.
On October 1, 1998, Mr. Robinson filed an amended complaint ("The Amended
Complaint") naming the same parties as defendants. In the Amended Complaint,
Mr. Robinson purports to represent the same class of purchasers of the Company's
stock in its August 1996 IPO. As in the original complaint, the Amended
Complaint purports to state claims under Sections 11 12(a)(2) and 15 of the
Securities Act of 1933 for alleged misrepresentations in connection with the
Company's IPO. Under the schedule adopted by the Court, defendants have until
December 15, 1998 to respond to the Amended Complaint. While it is too soon to
predict the outcome of the case with any certainty, the Company believes that it
has meritorious defenses to each of the claims asserted and intends to
vigorously defend itself.
On October 26, 1998, Maurice Marciano, Paul Marciano and Armand Marciano, as
individuals, (the "Marcianos"), as well as the Company, were named as defendants
in a shareholder's derivative complaint entitled John N. Robinson
16
<PAGE>
v. Maurice Marciano, Paul Marciano and Armand Marciano and Guess?, filed in the
Los Angeles Superior Court. The complaint (the "Derivative Complaint") purports
to state a claim for intentional breach of fiduciary duty, negligent breach of
fiduciary duty, constructive fraud and abuse of control in connection with the
Marcianos' management of the Company since its initial public offering (the
"IPO") in August 1996. A response by the defendants to the Derivative Complaint
is not yet due. While it is too soon to predict the outcome of the case with
any certainty, the defendants believe they have meritorious defenses to each of
the claims asserted and intend to vigorously defend themselves.
The Company believes the outcome of one or more of the above cases could have a
material adverse effect on the Company's financial condition and results of
operations.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
The Securities and Exchange Commission (the "Commission") recently amended
certain rules under the Securities Exchange Act of 1934 regarding the use of a
company's discretionary proxy voting authority with respect to shareholder
proposals submitted to the Company for consideration at the Company's next
annual meeting.
Shareholder proposals submitted to the Company outside the processes of Rule
14a-8 (i.e., the procedures for placing a shareholder's proposal in the
Company's proxy materials) with respect to the Company's 1999 annual meeting of
shareholders will be considered untimely if received by the Company after
December 1, 1998. Accordingly, the proxy with respect to the Company's 1999
annual meeting of shareholders will confer discretionary authority to vote on
any shareholder proposals received by the Company after December 1, 1998.
17
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1. Restated Certificate of Incorporation of the Registrant. (1)
3.2. Bylaws of the Registrant. (1)
4.3. Specimen stock certificate. (1)
10.35.* Fourth Amendment and Consent to the Amended and Restated Revolving
Credit Agreement by and between Guess ?, Inc. And BankBoston, N.A.,
F/K/A The First National Bank of Boston, Sanwa Bank California and the
Financial Institutions Party Hereto.
27.1.* Financial Data Schedule
* Filed herewith
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-4419) filed by the Company on June 24, 1996, as
amended.
- --------------------------------
</TABLE>
b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended
September 27, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Rule 12b-15 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GUESS ?, INC.
Date: November 11, 1998 By: /s/ MAURICE MARCIANO
--------------------------------
Maurice Marciano
Chairman of the Board, Chief Executive
Officer and Director (Principal
Executive Officer)
Date: November 11, 1998 By: /s/ BRIAN L. FLEMING
--------------------------------
Brian L. Fleming
Executive Vice President and
Chief Financial Officer (Principal
Financial Officer)
19
<PAGE>
10.35.* Fourth Amendment and Consent to the Amended and Restated Revolving
Credit Agreement by and between Guess ?, Inc. And BankBoston, N.A.,
F/K/A The First National Bank of Boston, Sanwa Bank California and the
Financial Institutions Party Hereto.
- --------------------------------------------------------------------------
FOURTH AMENDMENT
TO
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
BY AND BETWEEN
GUESS ?, INC.
AND
BANKBOSTON, N.A.
F/K/A THE FIRST NATIONAL BANK OF BOSTON,
SANWA BANK CALIFORNIA
AND
THE FINANCIAL INSTITUTIONS PARTY HERETO
Dated as of August 14, 1998
<PAGE>
FOURTH AMENDMENT
TO
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
This Fourth Amendment to Amended and Restated Revolving Credit Agreement
(this "Agreement") is entered into as of August 14, 1998, by and between GUESS
?, INC., a Delaware corporation having its chief executive office at 1444 S.
Alameda Street, Los Angeles, California, 90021 (the "Company") and BankBoston,
N.A. formerly THE FIRST NATIONAL BANK OF BOSTON, a bank with its head offices at
100 Federal Street, Boston, Massachusetts, 02110 (the "Agent"), SANWA BANK
CALIFORNIA, a bank with its head offices at 601 South Figueroa Street, Los
Angeles, California 90017 (the "Co-Agent"), and THE FINANCIAL INSTITUTIONS
PARTIES HERETO (the "Lenders").
RECITALS
The parties hereto have previously entered into that certain Amended and
Restated Revolving Credit Agreement, dated as of March 28, 1997 as amended by
the First Amendment and Waiver to the Amended and Restated Revolving Credit
Agreement dated as of April 30, 1997, the Second Amendment and Consent to the
Amended and Restated Revolving Credit Agreement dated as of January 30, 1998 and
the Third Amendment and Consent to Amended and Restated Revolving Credit
Agreement dated as of March 29, 1998 (collectively the "Credit Agreement");
A. By this Fourth Amendment, HSBC Business Loans, Inc. (AHSBC@) is added
as a Lender and the Lenders and the Lender=s Percentage has been revised as
provided on revised Schedule J to the Fourth Amendment;
B. By an Assumption and Assignment Agreement of even date (the
AAssignment and Assumption Agreement@), Sumitomo Bank of California has assigned
its entire Commitment to HSBC as reflected in Schedule J to the Fourth
Amendment; and
C. The Company, the Agent and the Lenders have agreed to modify the
Credit Agreement as provided below.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained in this Amendment and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree to the above Recitals and as follows:
1. Definitions. All defined terms used herein without definition
shall have the meanings assigned to them in the Credit Agreement.
2. Amendments to the Credit Agreement. From and after the date
hereof the Credit Agreement is hereby amended as follows:
a. The Credit Agreement is amended by deleting the definition of
ACommitment Amount@ and substituting the following definition to read as
follows:
Commitment Amount . $100,000,000 or any lesser amount, including zero,
resulting from a termination or reduction of such amount in accordance with
Section 2.5 or Section 7.2 .
b. Exhibit J is amended in its entirety as provided in Exhibit J to this
Fourth Amendment.
1
<PAGE>
c. The Borrower shall execute and deliver to the Agent the Revolving Credit
Notes in the form appended hereto as Exhibits A-1 through A-5 and shall receive
from the Agent marked cancelled the Revolving Credit Notes dated March 31, 1998.
3. Conditions to Fourth Amendment.
a. The agreements of the Agent and the Lenders as set forth in this Fourth
Amendment are subject to the fulfillment of the following conditions:
(1) Receipt by Agent of a copy of this Fourth Amendment Agreement
executed by the Company, Retail, Licensing and the Lenders;
(2) Receipt by the Agent of (i) the opinion of counsel to the Company in
form reasonably satisfactory to the counsel to the Agent; (ii) a certificate
signed by the Secretary or Assistant Secretary of the Company certifying, among
other things: (a) that the Articles of Incorporation of the Company has not
been amended since the certificate delivered on , 1998, (b) that the
By-laws of the Company has not been amended since the certificate delivered on
December 31, 1997, (c) that the appended resolutions of the Company's Board of
Directors authorizing the execution, delivery and performance of the Fourth
Amendment to the Credit Agreement is in full force and effect, and
(d)affirmation as to the names, incumbency and signatures of the officers of the
Company, Retail and Licensing executing the Fourth Amendment to Credit Agreement
and the other Loan Documents executed pursuant thereto;
(3) The occurrence of the Effective Date as defined under the Assignment
and Assumption Agreement; and
(4) Such other documents, instruments and agreements as Agent may
reasonably request in connection herewith or in order to effectuate the matters
described herein.
4. Credit Agreement Remains in Full Force and Effect. Except for the
amendments set forth in Section 2 hereof, no other amendment to the Credit
Agreement is being made or implied by this Fourth Amendment and all provisions
of the Credit Agreement shall remain in full force and effect, except as
specifically amended by this Fourth Amendment.
5. Representations and Warranties; No Default or Event of Default.
a. The Company hereby confirms that the representations and warranties
contained in Section 4 of the Credit Agreement are true and correct as of the
date hereof (except to the extent that such representations and warranties
relate to a prior date) and that no Default or Event of Default has occurred and
is continuing on the date hereof.
b. The Guarantors, which have consented to this Fourth Amendment, hereby
confirm that each of them is a Subsidiary for all purposes under the Credit
Agreement and that all of the representations and warranties contained in
Section 4 of the Credit Agreement are true and correct as of the date hereof as
to each of the Guarantors.
6. Governing Law. This Amendment shall be construed in accordance with
and governed by the laws of the Commonwealth of Massachusetts (without giving
effect to any conflicts of laws provisions contained therein).
7. Fees and Expenses. The Company shall pay the Lenders' reasonable
attorneys' fees and out-of-pocket expenses including, without limitation, other
normal and customary charges for photocopying, facsimile transmission, overnight
delivery, postage, long distance telephone calls and similar charges actually
incurred in connection with this Fourth Amendment as of and through the date
hereof.
2
<PAGE>
8. Counterparts. This Fourth Amendment may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which together shall constitute one instrument. In making
proof of this Fourth Amendment, it shall not be necessary to account for more
than one counterpart hereof signed by each of the parties hereto. Except to the
extent specifically amended or supplemented hereby, all of the items, conditions
and provisions of the Credit Agreement shall remain unmodified, and the Credit
Agreement, as amended and supplemented by this Fourth Amendment, is confirmed as
being in full force and effect.
SIGNATURES ON NEXT PAGE
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to be
duly executed as of the day and the year first written above by their duly
authorized officers.
GUESS ?, INC.
By:
------------------------------------------
Print Name:
----------------------------------
Title:
---------------------------------------
BANKBOSTON, N.A.
formerly known as
THE FIRST NATIONAL BANK OF BOSTON (AS AGENT
AND LENDER)
By:
------------------------------------------
Print Name:
----------------------------------
Title:
---------------------------------------
SANWA BANK CALIFORNIA (AS CO-AGENT
AND LENDER)
By:
------------------------------------------
Print Name:
----------------------------------
Title:
---------------------------------------
CREDIT LYONNAIS LOS ANGELES
BRANCH (AS LENDER)
By:
------------------------------------------
Print Name:
----------------------------------
Title:
---------------------------------------
HSBC BUSINESS LOANS, INC.
(AS LENDER)
By:
------------------------------------------
Print Name:
----------------------------------
Title:
---------------------------------------
Acknowledged and Consented to:
GUESS ? RETAIL, INC.
By:
-----------------------
Print Name:
---------------------
Title:
-----------------------
GUESS? LICENSING, INC.
By:
-----------------------
Print Name:
---------------------
Title:
-----------------------
4
<PAGE>
EXHIBIT J
LENDER'S PERCENTAGES
<TABLE>
<CAPTION>
Lender Maximum
Total Lender's
Commitment Percentages
<S> <C> <C>
BankBoston, N.A. $30,000,000 30.000%
100 Federal Street
Mail Stop 01-09-05
Boston, Massachusetts 02110
Attention: Nancy Fuller, Director
Telecopier: (617)434-6685
Sanwa Bank California $26,875,000 26.875%
Sanwa Bank Plaza
601 South Figueroa Street
10th Floor
Los Angeles, California 90017
Attention: Nicole Garnier, Vice President
Telecopier: (213)896-7090
Credit Lyonnais $20,000,000 20.000%
Los Angeles Branch
515 South Flower Street
Suite 2200
Los Angeles, CA 90071
Attention: Dianne Scott, Vice President
Telecopier: (213) 623-3437
HSBC Business Loans, Inc. $23,125,000 23.125%
45 Milk Street
Boston, MA 02109-5105
Attention: Paul Przybylski, Vice President
Telecopier: (617) 695-2328
</TABLE>
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-27-1998
<CASH> 4,462
<SECURITIES> 0
<RECEIVABLES> 37,153
<ALLOWANCES> 4,786
<INVENTORY> 103,706
<CURRENT-ASSETS> 175,871
<PP&E> 180,845
<DEPRECIATION> 92,355
<TOTAL-ASSETS> 283,542
<CURRENT-LIABILITIES> 52,759
<BONDS> 124,900
0
0
<COMMON> 137
<OTHER-SE> 90,209
<TOTAL-LIABILITY-AND-EQUITY> 283,542
<SALES> 309,102
<TOTAL-REVENUES> 338,974<F1>
<CGS> 193,505
<TOTAL-COSTS> 294,169
<OTHER-EXPENSES> 591
<LOSS-PROVISION> 257
<INTEREST-EXPENSE> 9,779
<INCOME-PRETAX> 34,435
<INCOME-TAX> 13,405
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,030
<EPS-PRIMARY> $0.49
<EPS-DILUTED> $0.49
<FN>
<F1>Includes net royalties of $29.9 million.
</FN>
</TABLE>
